A Marriage Not Made in Heaven
Laura Santini (laura.santini@thomsonmedia.com)
Feb. 17, 2003
It would be the unlikeliest of unions, but hedge funds may start trying to buy up struggling biotech companies whose cash reserves and dirt-cheap stock prices make for an opportunity just too tempting to pass up.
An offer last week by hedge fund LB Acquisitions LLC to buy Caliper Technologies Corp. for $101.7 million has kicked up a whirl of excitement on Wall Street-and now investors and investment bankers are speculating on whether similar hedge fund offers will follow in biotech. Caliper reported $154.3 million in cash at the end of 2002, according to the company's earnings release; its market capitalization, meanwhile, is a mere $78.6 million. Based in Mountain View, Calif., Caliper develops technology that allows laboratory experiments to be carried out on computer chip.
"I've been waiting for this to a happen," said Mitch Kaye, chief investment officer of Brown Simpson Asset Management's X-Mark funds, which invest in micro-cap biotech companies.
LB Acquisitions' apparent strategy-to buy the company on the cheap and pocket the cash-would not have been feasible in biotech until now, Kaye said.
"This is a first for the industry, because there never has been a lot of cash in biotech," Kaye said. Although known for rapidly burning through cash as they pay research and development costs, many biotechs are still holding significant cash amassed during the heady underwriting days of 2000. In addition, many appear unable or severely delayed in getting products off the ground.
"There are biotech companies with a lot of cash that seem to be spinning their wheels," Kaye said. As they continue to operate, share prices decline, which squanders shareholder value, he added. Kaye said he counts 50 biotech companies in a similar situation.
"Really, something should be done with them," said Libbe Englander, a hedge fund and mutual fund manager at InvestBio, a unit of Diversified Biotech Group Inc. Continuing under the status quo, she said, "isn't optimal for anyone except management."
Enter hedge funds. With their large pools of cash and ready access to leverage, hedge funds may increasingly try to strike M&A deals with these flailing biotechs-offering shareholders a better price than the market and securing a fairly fat return for themselves, naturally.
Consider LB Acquisition's offer. The hedge fund would have paid shareholders $101.7 million for the company, or $4.15 per share, a 30% premium over Caliper's share price last Tuesday. The hedge fund would pocket the company's $154.4 million in cash, minus certain expenses. According to a press release, the fund also would establish a $5 million trust in which to hold Caliper's intellectual property, awarding 80% to shareholders, 10% to employees and keeping 10% for itself.
"Hedge funds are looking for any opportunity," one prime broker said. "I haven't seen any hedge funds take over a company and break it up," he added,
"but if it's an opportunity to make money, hedge funds will do it."
Several biotechs appear ready for the plucking. Sunnyvale, Calif.-based Pharmacyclics Inc. reported $101.4 million in cash at the end of the second quarter, while its market cap lumbers along at $49.92 million. Its stock was trading at $3.07 Thursday. Similarly, New Haven, Conn.-based CuraGen Corp. is holding $414.8 million in cash, according to its year-end earnings release, but the company's market cap dawdles at $184.9 million. CuraGen shares were trading at $3.75 Thursday.
Given that Caliper shares have plunged from around $35.00 to $3.00 in the past two years, Kaye and other investors said, LB Acquisitions' offer seemed to provide shareholders with a reasonable out.
The question, Englander pointed out, is: What is the company going to do, or what can it do, to lift its share price to its former level? At this point, a 30% premium looks attractive to her, she said, adding that she is not an investor in the company.
Caliper's board unanimously rejected the offer Wednesday evening. The company did not provide comment by press time. In a news wire story, LB Acquisitions said it intended to raise the offer following the board's rejection. The fund also could go hostile, bypassing the board and making a direct appeal to shareholders, explained Bruce Goldfarb, senior managing director of Georgeson Shareholder Communications Inc., a proxy solicitation firm that handles such actions.
Whether shareholders at Caliper and others accept hedge fund offers depends primarily on whether they remain bullish on their biotech's long-term prospects. Stephens Inc. biotech analyst Stephen Zhang sounded more pessimistic about hedge fund acquisitions of biotech companies; he contended that if a company's technology is valuable, it might be better for the company to merge into another biotech or remain separate.
Caliper was trading at $3.54 Thursday, up 18% following the board's rebuff of LB Acquisitions.
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